Shifts Demand Curve and Movement Along the Demand Curve - Assignment Example

Describe the differences between shifts in demand and movements along the demand curve. The demand curve is negatively sloped for virtually all goods represented in the graph. However, there is a range on the level of responsiveness according the type of good, and the economic cycle, which determines the steepness of the slopes. The demand curve has two changes in respect to the factors affecting consumers or goods, the shift in demand curve and the movements along the demand curve. Logically, movement along implies the curve remains in the same point, but the point changes, while shift in demand curve means the change in position of the curve; the demand curve (O'Sullivan & Sheffrin 2003 p. 81). The two movements are distinct. According to Tucker (2010), Movement along the demand curve is change in amount, quantity demand, when the cost of purchase of a good changes. It is important to note that the price is the only factor that causes movement along the demand curve. On the other hand, a shift in demand is caused by all the remaining factors, that impact on changes in quantity demanded, price being at ceteris paribus (Arnold 2008). A shift in demand is the change in position of the demand curve, caused by a non-price factor of demand, yielding to a new demand curve. In essence, shifts in demand are caused by determinants, whose changes will make a consumer to purchase a more or less of a good, when the price of the good remains constant (Binger & Hoffman 1998). The earthquake and nuclear explosions in Japan have resulted in a left shift of the demand curve. This has been due to the low output and high prices. The rise in prices seemed desirable for the policy institutors, who apparently had anticipated for a deflation. However, the rise in inflation to over 4% reported by the World Bank and specific focus in Japan indicated, a crisis that has worsened its demand for goods. This will translate to, few investors expected and contracts in the sterling pounds. Hence, such disaster translated in the demand curve , will give a movement along a demand curve caused by increasing prices. On the other hand, the aggregate loss in income, production and output will translate in shifts in demand curve to the left, due to the negative effects of the curve (O'Sullivan & Sheffrin 2003 p. 82). The price of the means of transport is also scheduled to rise because of seeking other forms of transport. The manufacturers of Toyota, Honda and Nissan will have reduced demand for their products, and as such the individual firm and household demand curves will be affected reflecting shifts in demand and movement along the demand curves (OnLineTexts.com, Inc 2003). The paper will take illustration from automobile industry. When the price of the electric cars increases, all other factors remaining constant, it will result into a movement along the demand curve, from P1 to P2 with a drop in the quantity demanded dropping from Q1 to Q2. Movement along the Demand Curve On the other hand, a when the price of petrol goes down, and the cost of purchase of fuelled cars also drops, we shall have a shift in the demand curve to the left, from D1D1 to D2D2, implying that quantity demand will reduce from Q1 to Q2. On the other hand when the price of fuelled cars goes up, as well as the price of gasoline, demand curve shall reflect a shift to the right, from D1D1 to D3D3. Thus, implying that, quantity demand will increase from Q1 to Q3. In these shifts, contraction and expansionary we shall experience a fixed price P1 of electrical cars (Biz/ed 2011). A rightward shift in demand curve implies increases in demand curve, which is a good trend in the market for the good- expansionary. However, a leftward shift implies a negative impact that causes less demand for the electric cars, contraction. Shifts in demand curve What are the main factors which can shift the demand curve? The main factors that cause shifts in demand curve are the non-price determinants. These factors are; Change in consumer disposable incomes (caused by government regulation like tax), Population change in size and consumption, Consumer preferences, Prices of related goods, Substitutes are goods that can be consumed in place of one another, Complements are goods that are normally consumed together (Biz/ed 2011). a) Chang in consumer disposable income An increase in income means, consumer’s disposable income increases, as well as his/ her marginal propensity to consume goes up. Therefore, demand for electric cars will increase. This is because, a consumer’s demand for the electric cars is constrained by the amount of disposable income, and an increase in their wages and salaries will relax the constraint. In effect, the pay rise will increase the consumer’s marginal propensity to consume more products (OnLineTexts.com, Inc 2003). A tax imposition or increase in tax on the consumers incomes, will result in reducing their disposable income, which will result in reduction in their spending, hence the demand for a good will reduce proportionately. This can be illustrated below Shifts in demand curve due to changes in consumer income An increase in consumer’s income increases the quantity demanded from Q1 to Q3. Hence, shifting demand curve fromD1D1 to D3D3, while a decrease in consumer income reduces the quantity demanded of a product from Q1 to Q2 shifting demand curve from D1D1 to D2D2. When the economy gets into inflation, more people will be unemployed and the aggregate quantity demanded of a good will reduces, causing a shift to the left. This also affects the consumer income. b) Population size, structure and consumption When the population is made up of youth or females contributing a large portion of it, it is likely that the kind of goods mostly demanded, will be luxurious goods with high tendencies of fluctuations in demand, due to changes in fashion. Therefore, perfumes and fashion products, are likely to experience shifts in demand to the right; an extension. Generally, an increase in population causes an extension shift on demand curve (Biz/ed 2011). For example, a bookshop in a local area will experience high demand for books during the holiday as most students will at home even if the prices are unchanged. Again, many people experience urban sprawl and increases in demand for products, where the municipal boundaries are extended ever wider by the housing developments. However, a decrease in the population, leads to a contraction left shift of the demand curve. Demand for products falls with a decrease in population (Binger & Hoffman 1998). Increases in population, consumption, and with a majority preferring a particular type of good, will result rightward shifts in demand curve, reflected in quantity demanded, from Q1 to Q3 and shifting from D1D1 to D3D3. On the other hand decrease in population or number of consumers in a particular area, will be reflected decrease in quantity demanded, from Q1 to Q2 and an inward shift of demand curve from D1D1 to D2D2. c) Consumer tastes and preferences If consumers prefer a particular good over the other, the quantity demanded for such goods will increase, as will be reflected in the demand curve shifting outwards. Perfumes and fashion industry experience these changes more frequently. A liking to a specific type of perfume by most consumers, or a high demand for a particular design of clothes, will be reflected in the outward shifts of the demand curve (Tucker 2010). However, a sudden change, as usually happens, for another upcoming design or fashion will significantly reduce, demand for that particular product causing a shift to the left in the demand curve, ceteris paribus price. In addition, when most consumers prefer electric cars because they are environmentally friendly and economical, the demand curve will experience an outward shift in demand curve. d) Price of related goods If the cost of purchase of a related good, say fuelled vehicles, increases, demand curve for the electric cars will shift to the right. This is because of the most consumers will opt to buy electric cars, which are more affordable than the fuelled cars. These related goods can either be a substitute (fuelled cars) or a compliment, the charged battery that drives the electric car. As illustrated, substitutes are commodities that serve the same purpose as the one on hand. While compliments, are those commodities that are used together with the product at hand for it to function properly. For instance, a rise in price of an electric car battery in the overall will mean an increase in the operation costs of the electric cars which will reduce the demand for the electric cars, causing a shift in the demand curve to the left (Tucker 2010). When the prices of substitutes increases the demand curve for a good shifts from D1D1 to D3D3 and the quantity demanded for the good increase from Q1 to Q3. References Arnold, R. A, 2008, Microeconomics, London, Cengage Learning. Binger, B & Hoffman, E, 1998, Microeconomics with Calculus, 2nd ed: A change in relative price changes the distribution of income which in turn changes the demand curve, London: Addison-Wesley. Biz/ed 2011, Movements of a Demand Curve [Virtual Learning Arcade], Retrieved March 29, 2011, from http://www.bized.co.uk/virtual/vla/theories/demand_curve_movements.htm OnLineTexts.com, Inc 2003, Introduction to Macroeconomics: Supply and Demand, Retrieved March 29, 2011, from http://www.econweb.com/MacroWelcome/sandd/notes.html O'Sullivan, A, & Sheffrin, S. M, 2003, Economics: Principles in action, Upper Saddle River, New Jersey: Pearson Prentice Hall. pp. 81–82. Tucker, I.B, 2010, Survey of Economics, USA: South-western publishers, pp.101-203. Read More